Spain’s Leader Faces Political Storm Over Corruption

Maria Tadeo

Tuesday, 22 Jan 2013 | 9:28 AM ETCNBC.com

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Pierre-Philippe Marcou | AFP | Getty Images

Prime Minister of Spain, Mariano Rajoy.

Spanish Prime Minister Mariano Rajoy is facing an escalating political storm after his former party treasurer was accused of tax evasion and fraud linked to a 22 million euro fortune hidden in Swiss bank accounts.

Former Senator Luis Barcenas also faces allegations of money laundering through a Latin America-based company, Conosur Land, dedicated to farming and construction, which he allegedly used to transfer undeclared funds out of Europe into Argentina. In addition, he is suspected of paying cash kickbacks to senior officers of the People's Party ranging from 5,000 euros to 15,000 euros.

Details on the secret bank accounts linked to Rajoy's former treasurer have emerged only months after the Spanish PM vowed to crack down on the country's black economy by limiting cash payments. Rajoy said his government would toughen tax inspections and go after tax dodgers- in particular those with undeclared assets overseas.

The Spanish PM has ordered an immediate external audit of the party's accounts in an attempt to distance himself from any wrongdoing. But according to El Mundo newspaper, Rajoy, who did not receive under the table the money, was aware of it and ordered Barcenas to stop handing cash in 2009, only months before he was forced to resign as treasurer. The money is said to have come from donations and construction. Rajoy's party has denied the allegations.

"Corruption of various sorts is a significant problem in Spain," said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

"Spanish politicians, and perhaps more worryingly the Bank of Spain, have come under scrutiny of late for various alleged wrongdoings at a time when the economy remains in a dreadful state."

The allegations threaten to jeopardize his party's credibility and, ultimately Rajoy's leadership, as Spain battles mass unemployment and a deepening recession. Rajoy warned that his hand won't tremble if the allegations against Barcenas are proven to be true amid public uproar over widespread corruption among Spanish politicians.

But the Spanish PM is set to face further scrutiny after speculation emerged that Barcenas may have benefitted from a fiscal amnesty introduced under his watch in 2012, which allowed tax evaders to declare up to five years of hidden income at a 10 percent tax rate without criminal prosecution. If the allegations are indeed correct, Barcenas may have laundered up to 10 million euros taking advantage of Rajoy's tax amnesty.

Spain's domestic troubles could threaten its fragile position among international investors despite recent market optimism, which has seen Spanish 10-year bond yields fall below 5 percent, in line with ECB President Mario Draghi's pledge to protect the euro area.

"There is a striking disconnect between sentiment and economic fundamentals. Sentiment towards Spain has never been more favourable since the crisis escalated in 2011," added Spiro of Spiro Sovereign Strategy. "The market itself is setting itself up for a fall, the severity of which remains in question."

Barcenas resigned as treasurer of Rajoy's party over allegations of corruption as part of the Gurtel probe in 2009, which saw various high-profile conservative politicians investigated for fraud and money laundering in the region of Valencia. There are more than 200 on-going corruption cases involving politicians from Spain's major political parties, PP and PSOE, King Juan Carlos' son-in-law Inaki Urgadarin and Spanish singer Isabel Pantoja.